The economy has reached its destination!

From the news:

The U.S. economy is running at its full potential for the first time in a decade, a new milestone for an expansion now in its ninth year.

The chart illustrates “vividly”.

To get that “encouraging” result, the CBO has applied the saying: “If the mountain won’t come to Mohamed, Mohamed must go to the mountain” in reverse, with the “mountain” (potential) coming to “Mohamed” (actual output).

Yellen will be leaving with the feeling of “mission accomplished”, even if that is far from the truth.

The charts below compare the recessions of 1990-91 and 2007-09 and the two long expansions that followed them.

Why has the economy performed so differently in the two occasions? The behavior of monetary policy, given by the behavior of NGDP goes a long way to clarify things.

For example, note that initially the contraction of 2007-09 was much milder than the one in 1990-91. It only became a “great recession” when nominal spending (NGDP) tumbled.

Likewise, the weak expansion of 2009-17 is linked to the more stringent monetary policy (NGDP) applied in 2009-17.

With the economy “attached” to potential, the Fed feels it is his business to keep the economy from “overheating”. No surprise, then, that both the outgoing and incoming Chairperson said “the U.S. central bank would continue with its path of gradual increases in short-term interest rates because the economy is performing mostly in line with its expectations.”

It appears there´s no limit to how low those “expectations” can go!


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